Did World War II end the Great Depression?

We examine whether local economies that were the centers of federal spending on military mobilization experienced more rapid growth in consumer economic activity than other areas. We have combined information from a wide variety of sources into a data set that allows us to estimate a reduced-form relationship between retail sales per capita growth (1939-1948, 1939-1954, 1939-1958) and federal war spending per capita from 1940 through 1945. The results show that the World War II spending had virtually no effect on the growth rates in consumption that we examined. This contrasts with Fishback, Horrace, and Kantor’s (2005) findings of about half a dollar increase in retail sales associated with a dollar of New Deal public works and relief spending. Several factors contributed to this relative lack of impact. World War II spending often required a conversion of plants designed for civilian good production into military factories and back again over the 9 year period. Substantially higher federal tax rates that were paid by the majority of households imposed much stronger fiscal drags on the benefits of the spending. Finally, less of the military spending was earmarked for wages and use of locally produced inputs, which reduced the direct stimulus to the local economy.

Here is the paper, here are non-gated versions. My understanding has long been that wartime orders from Europe, by 1940, provided the decisive turning point for the American economy. So if WWII did end America’s Great Depression, it was not through the traditional mechanism of massive domestic fiscal stimulus.

The classic article dispelling the idea that economic progress in any meaningful sense went up during the war is

Robert Higgs
War Prosperity? A Reassessment of the US Economy in the 1940s
Journal of Economic History 1992, 52(1), March: 41-60.

Naive economics has thought otherwise because of positive change in standard measures: employment, GDP, real private consumption. Higgs dissects the numbers with an understanding that the period was NON-STANDARD, so time series comparisons cannot be made in the standard way. Making reasonable adjustments he concludes that economic well-being in every sense declined during the period. Breaking windows in Berlin and Tokyo didn’t bring prosperity. The argument does not include, of course, the benefits of defeating Hitler nor the euphoria of common purpose that a success war brings, but presumably claims that war ended the depression likewise exclude those considerations.

This article is one of Higgs’ best, but there is plenty more where it came from. Please see his great recent book:

Depression, War, and Cold War
Studies in Political Economy (Oxford UP, 2006)

To all those who are so convinced that the GD in the US
lasted so long because investors were scared, and that
wartime fiscal policy had nothing to do with the recovery,
I have a simple question: how did even scarier to investors
Germany under Hitler get out of its even deeper depression
so much sooner than did the US?

Hitler’s money man was playing fast and loose, with the help of some American financiers, and from what I’ve read, he was building a house of cards. It was a kind of bubble, but I’ll have to look back through a few old books for those details.

But hey, its Saturday, and my schedule is relatively free. . .

JimJanuary 13, 2007 at 5:22 pm

I agree with Tyler that some (Krugman) vastly overrate the idea of a liquidity trap during the depression. If that was the case, why were the Fed’s brief open market operations of mid 1932 so effective? It is simply a tragedy that this effort was cut short.

On the Fed’s 1932 actions, see Friedman and Schwartz’s Monetary History, Meltzer’s History of the Fed, and Christina Romer “Was the Federal Reserve Constrained by the Gold Standard During the Great Depression? Evidence from the 1932 Open Market Purchase Program, with Chang-Tai Hsieh, Journal of Economic History, March 2006.

Tom KellyJanuary 13, 2007 at 6:13 pm

Any argument that any war helps the economy is absurd, especially for young men who are forcibly handed the instruments of war and told to kill or be killed. Even for a utiitarian, the loss of their utility alone outweighs all other considerations. For a dynamist, the loss of their creativity is monumental. How many people are still dying today of diseases whose cure creator died on a World War II battlefield?

spencerJanuary 15, 2007 at 11:22 am

For my father it was over when he got a job in 1939.

It’s a recession if your neighbor loses his job and a depression if you lose your job.